Blog Post

What is a peer to peer lending platform? Those new to the world of investing and or peer to peer lending may be asking themselves this very same question- money in hand and mouths slightly agape. Hold your horses there compadre, there’s a lot to explain, and a lot to understand. Before we address the question of ‘what is a peer to peer lending platform? ‘ let’s first explore our understanding of what peer to peer lending is in general.

As you’re most likely aware, peer to peer lending has been growing steadily in popularity over the past few years. What with lowering interest rates and a general sense of distrust across the more traditional setups, peer to peer lending has presented itself as a savoury alternative to the usual fare. Peer to peer lending came to be in a reaction to the financial crisis in 2008. A void had been opened, and was quickly filled by forward-thinking entrepreneurs and start-ups looking to provide an alternative financial service to a somewhat rigid industry. Things had been well and truly shaken up.

With a rise in peer to peer lending comes a rise in the number of vendors who are able to facilitate it. These are known as peer to peer lending platforms. What is a peer to peer lending platform? A peer to peer lending platform may be understood as an intermediary between lenders (you) and the borrowers (those looking for a loan). Think of it like how eBAY acts as the middleman between buyers and sellers. They essentially cut out the need for any involvement from a bank. People may look to use a P2P lender for any number of different reasons: short-term loans, debt repayments, home renovations, you name it. Basically, people use peer to peer lending platforms in a mind to borrow money and then repay it at a later date – with interest.

When thinking about the notion of ‘what is a peer to peer lending platform?’, it’s important that we consider all the pros and cons, and why people choose them.

Some of the benefits of choosing a peer to peer platform

1. Higher Returns: By opting to use a peer to peer lending platform the lender can generally enjoy a higher percentage return than offered by banks and other traditional institutions. It’s important to bear in mind, however, that with a higher percentage interest rate comes a higher level of risk.

2. Sense of community: Peer to peer lending platforms allow likeminded people to come together in a community. Some people also feel a sense of social well-doing by taking part in peer to peer lending. People are often presented with the opportunity to approve borrowers who may have a poor credit history and have been turned down by the bank. Peer to peer lending presents the opportunity to be more inclusive and avoid the more bureaucratic tendencies of the banks.

3. Avoid the banks: Peer to peer lending allows lenders to bypass the banks. Peer to peer lending allows for far less longwinded administration processes and exclusive criteria to fulfil.

4. Risk diversification: Peer to peer lending platforms offer the lender the opportunity to diversify their portfolio; by having the choice to select your loans you can reduce your risk of experiencing losses. Remember the old saying “don’t put all your eggs in one basket”?

Some of the disadvantages of choosing a peer to peer platform

1.Higher risk: As mentioned previously lenders are subject to defaults (when a loan is late repaying). Peer to peer loans are generally more unpredictable than a traditional loan from a bank, and while they may be able to offer higher returns, are subject to a higher amount of risk.

2. Regulation: Whilst the industry is regulated, and some companies are FCA authorised, it Is still a relatively new sphere. With this, there are bound to be teething problems with some companies. Some of which are likely to be more transparent than others with their practices. The House Crowd are fully FCA authorised as of January 2018 and maintain a responsibility to fulfil the expected needs and requirements of their investors. You can read our CRISPS charter here.

3. Security: If a peer to peer platform offers unsecured loans it is possible that in the event that something goes wrong your money will be uncoverable. Unlike traditional lenders, peer to peer lending is unable to offer protection in the form of the FSCS.

Secured vs unsecured loans: identifying your lender

So we’ve already mentioned that in the absence of secured loans, the lender could find themselves in hot water. Considering the question ‘what is a peer to peer lending platform?’ is one thing, but considering how to identify which platform is the right one for you is a whole other problem. So what exactly is a security? How and why will it affect your investment and choice of peer to peer lending platform.

Some peer to peer lending platforms offer unsecured loans. If a loan is unsecured this makes the investment an immediately riskier affair for the investor. If a lender loses their money, there isn’t a way to recoup the money. Through use of an example, let’s explore what this could mean. Let’s say that someone wanted to ‘do up’ their car. After approaching a peer to peer lender, the lender gets their hands on the money they need to carry out the necessary car work (probably the clutch- it’s always the clutch).

After an agreed amount of time, the borrower is supposed to repay the loan. For whatever reason, they can’t afford to and have now left the lender without any money.

If this had transpired under different circumstances (i.e through a secured peer to peer loan), when the borrower was unable to repay, their assets would have been seized by way of a legal charge and subsequently used to relieve the debt that was owed. It’s always very important to know exactly what the circumstances are of a loan, and the level of security offered by the lender. The House Crowd, in all circumstances, ensure that loans are accompanied by a security asset and legal charge. This way, if something goes wrong the security can be used to help recover the investors’ money.

If you’re trying to understand the question of ‘what is a peer to peer lending platform?’ it’s a good idea to start from the ground up. Once you have an understanding of what one is and how they operate, you can begin to make an informed decision on what platform is the best fit for your financial circumstance. If you would like to find out more about what we do and how we do it feel free to visit our website and register your account today.